Adding Value to Your Card Products - Building a Business Case for Rewards

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Adding Value to Your Card Products- Building a
Business Case for Rewards

• Dan Thompson
• JHA Payment Processing Solutions

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Agenda

• Defining Rewards
• Competition
• Research
• Successful Program Components
• Cost/Benefit Analysis
• Case Study
• QA

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Defining Rewards

• A permanent or long-term incentive offered to
  participating cardholders in order to achieve
  commitment and primary-card usage status
• Loyalty points represents the second-largest
  currency in issue, behind the US dollar. More
  than 100 million consumers receive promotional
  currencies (i.e. points)

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Defining Rewards

• Reward types
• Points-based
• Cash rebate
• Travel
• Gift/gift certificate
• Discounts
• Cash back
• Co-brand/partner-based
• Other

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Competition

• Top Bank Issuers
• All offer a rewards card
• All offer cash back or cash rebate
• Non-bank Issuers
• High Performing Credit Unions
• 9 of 10 top credit unions by asset size offer a
  rewards card
• 7 of 10 top credit unions in credit card
  penetration offer a rewards card
• 6 of 10 top credit unions in growth in
  outstanding credit card balances offer a rewards
  card
• 5 of 10 top credit unions in average credit card
  balance offer a rewards card
• Relationship Strategy

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Competition

• 1.4 billion card solicitations in 2nd quarter
  2004, 52 were rebate/reward offers
• 53 cash back
• 37 non co-brand cards
• Rewards cards are growing faster than co-branded
  cards

Synovate/CCM
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Competition

• AMEX Everyday Promotion gives double and triple
  points non-travel purchases account for 2/3
  volume
• Providian allows cardholders to buy-down APR or
  waive fees with points
• Discover offers up to 5 cash back at
  supermarkets, drug stores and gas stations
• Chase offers 3 cash back on all gasoline
  purchases
• Citi offers a full 5 cash back or 5 points per
  dollar spent at supermarkets, drug stores and gas
  stations

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Competition - Debit

• ¾ of debit cards carry no incentives
• Debit rewards issuers charge an annual fee
  ranging between 19-65 per year

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Opportunity

• 50 of credit card used in 2004 were not in the
  cardholders wallets a year ago
• The average monthly new charges in the first
  quarter for a rewards card were 943 compared to
  360 for a non-rewards card Synovate Inside
  Track
• 2004 TNS Global Study
• Reasons for opening a new account
• Rewards ranked 2ND for all reasons listed
• Rewards ranked 1st for most important reason
• Most important reasons for making card primary
• Rewards ranked 1st 27

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Research

• Visa Credit Card Commitment Study
• Committed
• Open
• Unavailable
• Uncommitted
• Offer most potential
• The cost to acquire a new customer is six times
  the cost of maintaining existing ones.
• A 5 increase in customer retention yields a 75
  increase in customer value.
• Young 18-24
• Rewards is trigger

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Credit Card Commitment Research

• Individual card commitment
• First card ever owned
• Tenure
• Innovative/Unique Features
• Cross-relationship
• Rewards
• Communication
• Multi-card accounts
• Incentive for everyday purchases
• Superior service
• Internet access
• Higher credit limits
• Bill payment
• Member focus

Visa USA
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Research

• 2/3 of consumers say theyd prefer to have all
  their financial needs met by one institution
• 77 use a credit card issued from another FI
• 1 reason cited -gt lack of incentives offered by
  their primary institution
• 50 of debit cardholders surveyed said they would
  spend more on cards with rewards - Edgar, Dunn
  Co.

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Research

• Rewarded cardholders are more profitable
• 80 of reward participants do more business as a
  result of the program
• Membership in a rewards program makes these
  groups more likely to do more business with that
  company
• 89 of consumers 18-24 years old
• 86 of consumers w/ income 75k-100k
• 86 of consumers w/ income over 100k
• 60 of American Express cardholders are enrolled
  in one or more Membership Rewards programs, up
  30 from 1998
• 54 lower attrition
• Spend 40 more in 1st year
• Have ½ credit loss rates
• Pay bills faster
• Average profitability is 5-times that of
  non-rewards

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Research

• 60 of consumers said that a rewards program
  influences their decision of which credit card to
  use
• 75 of redeemers indicate a rewards program
  influences their decision
• ½ of all adults participate in some type of
  rewards program
• 4 of 10 have opted out of a program
• 74 of the drop outs do less business with the
  company

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Successful Program Components

• Uncomplicated Clear
• Relevant
• Affordable
• Attainable
• Value perception
• Credit limit
• Marketing

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Successful Program Components

• Uncomplicated Clear
• Rules and Regulations
• 22 dont know all the rules
• 58 understand them somewhat
• 19 understand them very well
• 89 more likely to do business
• 4 out of 10 have opted out of a program
• 4 rules kept changing (or unclear)
• Internet impact

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Successful Program Components

• Uncomplicated Clear
• Relevant
• 27 of affluent travelers carry a air miles card,
  compared to 7 of non-affluent
• 69 of affluent use a rewards card, compared to
  37 of non-affluent
• 4 out of 10 have opted out of a program
• 3 rewards werent relevant
• 90 of rewards card offers have a cash back or
  cash rebate component

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Successful Program Components

• Uncomplicated Clear
• Relevant
• Affordable
• 4 out of 10 have opted out of a program
• 1 high fees
• 74 of the drop outs do less business with the
  company
• 80 of rewards card offers fell under 9.99 APR
  in 1st quarter 2004
• 90 of rewards card offers had no annual fee

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Successful Program Components

• Uncomplicated Clear
• Relevant
• Affordable
• Attainable
• Maritz Length of time it takes to build up point
  is primary reason consumers leave a rewards
  program
• 4 out of 10 have opted out of a program
• 2 inability to redeem
• Redeemers outspend non-redeemers by as much as
  355 - ESC
• The average monthly new charges in the first
  quarter for a redeemer were 943 compared to 360
  for a non-redeemer

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Successful Program Components

• Uncomplicated Clear
• Relevant
• Affordable
• Attainable
• Value perception

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Loyalty Programs -Consumer Preferences

• Preference
• Discounts
• Cash
• Merchandise
• Gift certificates
• Travel

• Behavior
• Gift certificates
• Cash
• Discounts
• Merchandise
• Travel

Source Maritz
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Card Rewards Payment Processing Solutions
Experience
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Successful Program Components

• Uncomplicated Clear
• Relevant
• Affordable
• Attainable
• Value perception
• Credit limit
• Average credit line 7,699
• Balance rises by 13 relative to credit line
  increase

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Rewards Case Study

• Is a rewards program affordable?
• Card Program Profile
• Premium credit card
• Full selection of reward types
• Competitive award levels
• Mature program 5 years
• Over 100 million points

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Cost/Benefit Considerations

• Pts-based rewards programs yield between 10 to 25
  transactions per active account each month
• Cash-back rebate cards average between 10 to 18
  transactions per active account each month
• Premium card w/ rewards exceeds 75 active

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Cost Analysis Case Study

• Average Rewards
• 11.8 trans
• 80 ticket
• 75.8 active (3306)

• Average Non-rewards
• 7.25 trans
• 80 ticket size
• 63 active (2748)

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Cost Analysis Case Study

• Average Gold Card
• 1,593,840 sales
• X .0175 interchange rate
• 27,892 interchange income
• Awards
• 0
• Adjusted interchange
• 27,892
• 10.15 per active account

• Rewards Card
• 3,120,864 sales
• X .0175 interchange rate
• 54,615 interchange
• Awards
• 687 admin fees
• 20,215 redemption
• Adjusted interchange
• 33,713
• 10.20 per active account

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Cash Back Case Study

• 1 Cash Rebate Card
• 18.22 trans/active
• 591 active accounts (83)
• 73 average ticket
• Interchange
• 13,756
• (7,860) cash back
• -------------
• 5,896

• No Cash Rebate Card
• 7.5 trans/active
• 435 active accounts (61)
• 82 average ticket
• Interchange
• 4,681

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Marketing Success

• Balance Transfer
• Program summary
• Product use Visa Gold credit card
• Value 9.6 APR
• Appeal 1 cash back on minimum 1000 balance
  transfer
• Promotion period 11/20/2002 offered for a
  limited time (ended January 1)
• Acceptance options return completed self-mailer,
  calling the service center, or visiting
• Web site.
• Results
• Response rate 3.09 (new and existing
  cardholders)
• 227 transfers
• Cost 2.84 per piece including 1 pay out
• 1,274,201 million new balances

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Marketing Success

• Incentives
• Program summary
• Product use Visa Gold credit card
• Value 10.9 APR
• Appeal Lowered interest rate and double reward
  points when use card for 12 or more purchases
  each month
• Promotion period July and August
• Acceptance options Use the card
• Results
• Response rate 852/833
• Average spending per qualifying account 1900
• 1.6 million in sales each month
• Recorded 2nd and 3rd highest total purchase
  volume, active accounts and total
• transactions (9/02)
• 7 increase each month in interchange income
  (compared to 6/03)

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Final Words

• 6 of 10 cardholders polled said they chose a card
  with rewards as their preferred card
• 90 stated they would not reduce usage or cancel
  their preferred card
• - Edgar, Dunn Co.

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Questions